Knoxville, TN Office Snapshot

May 5, 2023

Although Knoxville, TN, receives less attention than Nashville, it is a vibrant and rapidly growing city. Tennessee's population has grown significantly over the previous three years due to its low cost of living and ease of business. As a result, Knoxville has been growing at a 2% annual pace. Interestingly enough, the office market in Knoxville is quite the opposite of New York, San Francisco, and Chicago. According to Justin Cazana, CCIM, SIOR, Principal of Avison Young, their insulated office market has outperformed the national averages. Cazana moved into the brokerage business in 2004 and, in 2010, founded the Cushman & Wakefield office in Knoxville and eventually transitioning the company to Avison Young in 2015. They are the largest full-service commercial real estate firm in East Tennessee, providing investment sales, leasing, and management services to all non-multifamily asset classes.

The Knoxville MSA is home to 907,000 residents, with an unemployment rate of 3.3%. The University of Tennessee is a significant economic driver, attracting national businesses looking to capitalize on local talent. It is a highly diversified economy, with no one employment sector accounting for more than 22% of the total employment. A few notable companies headquartered here are Pilot Flying J, Regal Cinemas, Scripps Networks, and ORLN, a major U.S. Department of Energy facility. This year, Smith & Wesson's new headquarters is set to open; the company recently relocated from Springfield, Massachusetts. The move is expected to bring about 750 new jobs to the area.

Never missed a beat

Knoxville's office market has not had a significant uptick in vacancy post-pandemic. The overall market occupancy rate is 92%, and the CBD has a 95% occupancy rate. This can be attributed to the lack of development since 2008 and the quickness to return employees to the office. In addition, the market does not consist of major corporations with 500 employees; it is mostly smaller firms with 30-200 employees. According to Cazana, the majority of firms were full-time back in the office in August 2020. On the contrary, according to Avison Young's National Vitality Index, national office foot traffic has decreased by 52% from March 2020 to November 2022.

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The Vitality Index - National Office Foot traffic Avison Young

Bearden is the hottest submarket in the metro; occupancy is 96%, with average rents between $23 and $26/PSF. The central business district rents are averaging $20/PSF. According to Cazana, Class A office leasing is very active; for example, Century Park, an 80-acre development with 210,000 square feet of office space, has zero space available. Additionally, there is a new 60,000 sqft building under construction and a neighboring 20-acre site under contract.

While the national headlines portray the office market's demise, Cazana thinks differently. The majority of key-card data collections come from primary markets. For example, Cazana was just recently in downtown Nashville, one of the hottest markets in the country, and three of the Class A office buildings he visited did not have these systems. It is important to remember that real estate is hyper-local, and the overall market's health cannot be based on primary markets or singular data interpretations. But the trend that does remain constant is the flight to quality. Tenants now expect larger common areas, public Wi-Fi, on-site food facilities, and longer office hours. Instead of the standard 8 am to 5 pm operating hours, most buildings are kept open longer to accommodate flexible work schedules.

Re:Cap Key Takeaway

Knoxville is an even-keeled market with a diverse economy supporting its base. Quarterly office development on the national level is down by 50% year-over-year; meanwhile, Knoxville's demand for Class A space is driving new development to serve a growing local economy. The majority of development is occurring along the Pellissippi Parkway, which connects Cedar Bluff, Downtown Knoxville, and Oak Ridge. Overall the market continues to show strengths where other markets have floundered, and it will be interesting to see if the market can maintain this velocity throughout the rest of the year.

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